Wednesday, April 11, 2012
Releasing two chapters from next week's World Economic Outlook, which will publish its new forecasts for global economic growth, the IMF warns that in the near term, and perhaps the long term, commodity prices are likely to slump rather than to hold to present levels.
It also dismisses the case for sovereign wealth funds to invest revenues from commodity exports, saying the money would deliver a bigger return if it were invested in physical and social infrastructure to lift future productivity.
"The weak global economic outlook suggests that commodity prices are unlikely to increase at the pace of the past decade," the IMF says. "In fact, under the baseline World Economic Outlook projections, commodity prices are forecast to decline somewhat during 2012-13. Sizeable downside risks to global growth also pose risks of further downward adjustment in commodity prices."
The IMF's January update cut its forecast of global growth in 2012 from 4 per cent to 3.3 per cent, and in 2013 from 4.5 per cent to 3.9 per cent. Its latest comments suggest next week's revised forecasts will be similar.
They come as China yesterday reported a return to trade surplus in March, largely because its annual import growth fell to just 5.3 per cent. Imports of iron ore, for which Australia is its largest supplier, fell 9.1 per cent from a year ago.
The Bureau of Statistics reported last week that Australia's earnings from mineral exports had fallen by 17.5 per cent in the past six months, from $17.3 billion in August to $14.3 billion in February.
The Reserve Bank's commodity price index also peaked in August, and was down by almost 10 per cent in March.
Unlike Australia's Treasury and the Reserve Bank, the IMF is not convinced that commodity prices will stay high. It warns that long-term prices are "even more unpredictable", and their future direction has "unusually high uncertainty". It urges governments to take "a cautious approach ... building buffers to address cyclical volatility".
Governments earning revenue windfalls from commodity exports, it says, should adopt counter-cyclical policies: stash away windfalls and increase taxes in boom years to keep the economy on an even keel, then spend the windfalls and cut taxes when the boom goes bust.
It is unimpressed by the case for sovereign wealth funds, particularly those (such as China's) that invest in foreign government bonds offering low returns. It urges governments instead to direct the revenues from commodity booms into investment at home to lift productivity.
"Changes in public investment expenditures give the strongest output effect, by raising private sector productivity (for instance, via improvements in education, health and infrastructure), and subsequently by increasing private capital, labour and corporate incomes and consumption," it says.
Another essay from the Outlook, on household debt, says that when highly-geared housing booms go bust, falling house prices explain only about 25 per cent of the consequent slump in consumer spending.
The bigger impact, the IMF says, comes from going from a period of rapidly growing household debt to one of stable or declining leverage. That is why housing busts after years of rising debt are the most severe.
Its insight helps explain why the growth in consumer spending in Australia has slowed far more than was expected.